Asset-based Reallocations Gretchen Donehower Generational Wealth Accounts Workshop University of Georgia Athens, Georgia Thursday, February 1, 2018

Asset-based Reallocations Defined Asset-based reallocations are defined as the net flows to each age that arise from the existence of assets. Inflows consist of asset income and dis-saving. Outflows consist of saving and negative asset income, e.g., interest expense. Asset-based reallocations are one of two economic mechanisms for shifting resources across age.

The Flow Account Identity Inflows Labor Income Asset Income Transfer Inflows Outflows Consumption Saving Transfer Outflows

The final balancing item! Includes NOS of corp, imputed rent, and NMI of hh sector (less indirect taxes) Net dividends, interest, and rent

Public Asset-Based Reallocations This part is simple! Macro controls come from NTA Public saving macro control is same concept as government saving in SNA Public asset income macro control will come from net public operating surplus (generally very small) plus net public property income Age shapes come from the general (non-earmarked) tax profile

Private Asset-based Reallocations NTA principles and methods

Important Concepts Assets and asset flows Private asset-based flows An economic asset is a store of value over which ownership rights are enforced, individually or collectively, and from which the owner may derive economic benefits by holding it or using it over a period of time (UNSNA 1993, p 56). Asset flows consist of asset income and saving Private asset-based flows Asset flows to and from households, corporations, and NPISHs. Financial flows with public and private counterparts Interest on public debt is an outflow for government and an inflow for owners of government issued securities.

Types of Private Asset Income Types of Assets Asset income inflow/outflow Non-financial assets Produced assets (Capital) Operating surplus; capital’s share of mixed income Non-produced assets Rent (not rent you pay for an apartment… these are rents for things like mineral rights, copyrights, etc.) Financial assets and liabilities Equity and investment funds Dividends received (inflow) and paid (outflow) Loans and debt securities Interest received (inflow) and paid (outflow) Insurance, annuities, pensions ??? Other Various

Capital Income Three components of capital income measured relying on SNA Net operating surplus of corporations Net operating surplus of households Capital’s share of net mixed income Important: all measures are net of depreciation. Surplus of corporations and mixed income must be adjusted to incorporate taxes on production and net subsidies Operating surplus of households is equal to the imputed rent of owner-occupied housing Capital’s share of mixed income is not reported in SNA. We assume 1/3 of mixed income is return to capital.

Age Profiles of Capital Income NTA based on assumption that all assets are held by the household head. Operating surplus of corporations: age profile of property income (dividends, interest and rent). Operating surplus of households: age profile of imputed rent of owner-occupied housing. Capital’s share of mixed income: age profile of income from business, farms, etc. Note that the household amount is all attributed to the household head, in contrast to labor’s share of mixed income which was attributed to the people who worked for the farm or household-owned business

Property Income In UN SNA property income consists of: interest distributed income of corporations reinvested earnings on direct foreign investment property income to insurance holders, and rent. Some components not always available. Property income is different than capital income because all property income has a counterpart, i.e., inflows and outflows are matched. Counterpart may be ROW. For residents property income inflows will differ from outflows by net property income of ROW.

Age Profiles of Property Income Inflows All inflows go to the household head Age profile of property income Outflows Interest paid by households: interest expense by age of household head. All other outflows use age profile of property income.

Asset Income Age Profiles

Private Saving Private saving is the balancing item in NTA (and national accounts) Private saving at each age is calculated as:

Private Saving Private saving for children should be approximately zero because children are not household heads. Private saving not exactly zero for children because of approximation errors introduced through smoothing. Summed over all ages, private saving in NTA is equal to net national saving in SNA.

Illustrative Results

Components of asset-based flows (average of all countries)

Problematic Assumptions and Data? Role of household head Definitions vary across surveys Most surveys use an economic definition, e.g., principal earner. Some surveys use a self-reported head concept. Non-head members have asset-based flows that are assigned to the head Young adults may be accumulating wealth while living in households of their parents Older adults may retain ownership of assets while living in a household headed by adult offspring Implications of this approach can be analyzed to some extent using estimates of private intra-household transfers that are saved. But these results depend on model of intrahousehold transfers. Assignment of operating surplus Household surveys include only the distributed earnings of corporations. Methodology assumes that retained earnings has the same age profile as non-retained earnings. Estimates at upper ages may be unreliable due to small number of observations.

Concluding Observations Saving in current account provides a partial picture about how assets evolve over time, what’s missing? Bequests Other capital transfers Dowry, bride price and similar arrangements in rich countries Transition in household headship Changes in asset prices High asset income of young and middle-aged adults relative to saving suggests that these mechanisms are important.

Issues to Explore with Asset-based Reallocations Do the elderly rely on assets to fund their retirement years? Asset income Dis-saving Is the importance of asset-based reallocations changing over time? If so, why? Changes in public transfer policy? Decline in the extended family? Changes in financial systems, interest rates, etc.? How are current generations of prime-age adults behaving? Are their saving enough to meet their future retirement needs? Are they accumulating too much debt to finance education, purchases of homes, and other consumer durables?

Issues (continued) How important are bequests and other capital transfers relative to lifecycle saving? Do asset-based reallocations serve other important roles? Do people rely on assets to support their children, for example? How is population aging interacting with asset-based reallocations to influence important macroeconomic trends? How is the financial crisis affecting support systems and the economic circumstances of different generations?